The U.S. Government Accountability Office (GAO) issued a report this week that provides a detailed analysis of financial technology (fintech) products, examining both the benefits and challenges.
The GAO report said the products and services that fintech companies offer generally fall into four different areas: payments between individuals, and between individuals and
businesses; loans to consumers and businesses; advice on wealth management or general financial activities; and distributed ledger technology used to make payments, record and track asset ownership. The services are typically offered over the internet or through mobile devices.
Among their benefits, these products offer convenience and lower costs. For example, in terms of investment advice, robo-advisers, which are considered fintech products, offer low-cost investment advice using algorithms instead of humans.
“The U.S. regulatory structure poses challenges to fintech firms. With numerous regulators, fintech firms noted that identifying the applicable laws and how their activities will be regulated can be difficult,” the 132-page GAO report stated.
While fintech products typically pose similar risks as traditional financial products and services, their risks are not always addressed by existing laws and regulations. Further, the use of some fintech products could lead to data security and privacy concerns that could potentially impact overall financial stability.
Federal oversight of fintech firms is varied. While federal securities regulators oversee fintech investment advisers the same way as traditional investment advisers, in other cases, state regulators monitor the activities of fintech firms. This creates a situation where there are multiple regulatory entities. Thus, fintech payment and lending firms say complying with fragmented state requirements is both costly and time-consuming.
GAO recommends that regulators act collaboratively to better serve the industry. Specifically, the report suggested leading practices for interagency collaboration, including defining agency roles and responsibilities and defining outcomes. These practices could help resolve this conflict.
The report cites examples of how other countries have regulated fintech without stifling innovation. As one example, GAO discussed how countries have established innovation offices to help fintech firms understand regulations and foster regulatory interactions. Other countries use “regulatory sandboxes” which enable firms to offer products new products on a limited basis to determine the risks and benefits. In short, regulators abroad have established numerous ways to coordinate with other agencies on financial innovation.
“While some U.S. regulators have taken similar steps, others have not due to concerns of favoring certain competitors or perceived lack of authority,” the report stated. However, U.S. regulators should note that these approaches could result in better interactions between them and fintech firms.
The GAO received comments from several regulatory bodies, including the Federal Deposit Insurance Corporation (FDIC). “The FDIC recognizes the benefits of engaging in collaborative discussions with other relevant regulators. The FDIC will engage in collaborative discussions regarding liability for unauthorized transactions and consumer reimbursement.”
The Federal Reserve Board also commented.
“The Federal Reserve’s general approach to fintech developments is that, first and foremost, we have a responsibility to ensure that the institutions subject to our operated safely and soundly and that they comply with the applicable statutes and regulations. Within that framework, we have a strong interest in permitting socially beneficial innovations to flourish, while ensuring that the risks that they may present are appropriately managed,” the Fed Board explained.